India's equity market is expected to rise around 10% ahead of the general elections next year in anticipation of continuity and a majority, according to Morgan Stanley.

Post the 2024 elections, the foreign brokerage sees potential for the market to swing in a wide range, depending on the outcome.

Voting in the world's biggest democratic election will likely commence in April 2024, with counting and the release of results to occur on a single day in late May.

Historically, the Indian market approaches elections with optimism, writes Ridham Desai, equity strategist, Morgan Stanley. "We expect it to follow a familiar pattern this time around, i.e., pricing in a result that favors continuity in government with a majority," he says in a research report.

However, this is contingent upon how successfully the opposition shares the seats that pose a threat to the incumbent, the brokerage says, calling the 26-party alliance called the I.N.D.I.A. 'a significant development.'

"The key to this alliance's success, in our view, will be its ability to share seats amicably ahead of the elections. Clarity on this will only emerge closer to the election date," the brokerage says.

Sharing of a seat means that the opposition parties agree to a single candidate to fight the incumbent which can result in polarisation and lower predictability of the result, it adds.

BJP has its own 38-party alliance, called the National Democratic Alliance, or the NDA.

Advancing the election date could concentrate the market move into a shorter period, according to Morgan Stanley. The report assumes that the election dates are not advanced.

If I.N.D.I.A. were able to muster a viable pre-poll alliance, the market could become less bullish, says Morgan Stanley, adding that its upside forecast would not materialise in that case.

The brokerage points out that global growth, interest rates and crude oil prices could also alter its forecast. "We expect domestic growth to remain strong but a global slowdown is a risk. While Indian equity market correlation to US stocks has declined, any sharp decline (or rise) in US stock prices would influence the market in India. Lower crude oil prices would provide flexibility to cut domestic prices, reduce inflation and increase the chance of a rate cut before the end of 2023," it says.

Uttar Pradesh and Maharashtra are likely to be crucial to the election outcome, notes Morgan Stanley. These two states are the largest contributors to the Lok Sabha, with 128 seats, nearly a quarter of the Parliament's 543 elected representatives.

Pre-poll alliances in these states could polarise results since these two states have fragmented politics with the presence of regional parties, the brokerage says. In the current Lok Sabha, the BJP holds 85 seats or about 30% of its total count in the Lower House from these two states alone.

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